From the beginning of modern environmental regulation, there has been controversy over the best method to attain reasonable environmental pollution control. Those groups opposing extensive regulation have predicted dire economic consequences from the prohibitively high costs of compliance and cleanup. Indeed, the cost of environmental cleanup alone may run between an estimated $100 billion in 1988 to nearly $1 trillion in 1993. The Environmental Protection Agency's (EPA) estimates of an average $25 million for a typical toxic dump site cleanup suggest that the impact of these costs on individual companies may be severe. Compliance with environmental regulation comprises an estimated 2.5% of the gross domestic product (GDP) annually or nearly half of all the costs of government regulation. If these estimates are close to accurate, then a substantial number of publicly-traded corporations have considerable potential environmental liabilities, most of which remain undisclosed.

Title I of the National Environmental Policy Act (NEPA) mandates an overarching “national policy for the environment,” obligating the federal government to:

[co-operate] with State and local governments, and other concerned public and private organizations, to use all practicable means and measures . . . to foster and promote the general welfare, to create and maintain conditions under which man and nature can exist in productive harmony, and fulfill the social, economic, and other requirements of present and future generations of Americans.

Congress directed that all policies, regulations, and public laws of the United States be harmonized with the newly announced environmental policy. Furthermore, federal agencies must, to the fullest extent possible, systematically employ interdisciplinary approaches to assure the integration of natural and social sciences in environmental policy-making and implementation.

NEPA marked the shift from prior regulation, which was predominantly a private remedial method based on the existing common law of torts and property (e.g., nuisance), to the beginning of a national, comprehensive environmental policy. In subsequent major federal environmental laws Congress chose a primarily command and control regulatory method, illustrated in statutes such as the Resource Conservation and Recovery Act (RCRA). The shift to mandatory pollution standards and enforcement mechanisms has been only partially successful, however.

Uncertain and soaring compliance costs and rampant non-attainment has prompted experiments with market-based economic incentive approaches to assist in implementing environmental policy. Examples of market-based incentive approaches include trading of sulfur dioxide pollution rights authorized in the 1990 Clean Air Act (CAA) Amendments, new pollution sources offset through obtaining reductions in existing sources under the CAA's non-attainment provisions, the EPA's “bubble” concept under the CAA that permits combining all sources of pollution at a single facility under an imaginary regulatory “bubble,” and tax incentives. Furthermore, from the outset, concerned environmental organizations have pressured various federal agencies to implement the national environmental policy more aggressively through a number of methods, including expansion of market-based economic incentives to encourage more complete attainment.

Market-based incentives rest on the assumption that free markets operate efficiently only when participants are fully informed. Asymmetric information causes market failure by undermining rational choice. With the “greening” of America, environmental issues are in the forefront of most political, economic, and legal discussions. When the frequency and extent of individual firms' polluting activities are publicly known, market forces will pressure polluters to attain an equilibrium that balances a sustainable natural environment with comfortable economic progress in order to capture the investment dollars of green investors. Thus, complete disclosure of environmental liability will provide a fully informed public, enhancing the effect of market-based incentives. To date, such disclosures have been provided by specific environmental statutes, the EPA's disclosure policy, and financial disclosures of publicly-traded firms.

Existing environmental legislation and the EPA's disclosure policies unfortunately serve as inadequate market-based incentives for more complete environmental protection because of their episodic and limited distributional framework. Financial disclosures of environmental liabilities, on the other hand, serve as a more effective market-based incentive because of their more regular and widespread distributional framework. Accordingly, this Article examines how the use of greater financial disclosure of environmental liability can more effectively achieve attainment of national environmental policy goals. Part II examines the disclosures required under the various environmental laws, demonstrating the virtual impossibility of widespread dissemination of the disclosed information because of the morass of environmental regulation and the lack of a centralized reporting center. Part III examines the use of financial statements to disclose environmental liabilities, illustrating how such financial disclosure is more regular and widespread and can thus achieve its role as market-based incentive for greater environmental compliance. Part IV analyzes the way economic incentives adjust as environmental liabilities become more widely known.